Australia's managed fund industry has grown strongly over the year, with more money going offshore as investors diversify their portfolios into global assets.

The managed fund industry, including superannuation funds, had $2.38 trillion in funds under management as at 30 June this year, an increase of 3 per cent on the March quarter 2017 figure of $2.3 trillion and up 11 per cent from a year earlier.

Of that, $511.0 billion was invested in offshore markets, up 18 per cent from $433.1 billion a year earlier, according to data from the Australian Bureau of Statistics.

Australians are now investing more in offshore assets to access opportunities not available locally.

"International markets can provide investors with additional diversification benefits, and access to economic and sectoral themes that may not be available in the Australian market," says Morningstar senior analyst, manager research, Michael Malseed.

"Investors who use managed funds are generally getting a diversified portfolio of global assets with exposures loosely matched to the underlying benchmark. For global equities with an MSCI World Ex Australia benchmark, this means around 60 per cent exposure to US equities, about 20 per cent to the developed European markets, and about 10 per cent to Japan.

"Of course, active funds can vary substantially from the benchmark. Platinum International [4505] has around 20 per cent exposure to China, while Magellan Global [15699] has over 80 per cent exposure to the US."

For investors who are less risk tolerant, an index managed fund or exchange traded fund (ETF) can be an effective way to get broad exposure to international assets, says Bruce Brammall of Bruce Brammall Financial.

"If you don't know what you're doing, then an ETF can give you broad diversification to hundreds of companies around the world. But if you want to make a call on specific markets, then an ETF or managed fund that focuses on particular sectors or geographical regions can be good. It all depends on your risk profile," he says.

"If you do take on sector risk or geographic risk, and if you get it right, then your investment can do fantastically well. But if you get it wrong, you'll underperform."

For some investors, offshore exposure in a balanced portfolio can be as much as half their portfolio, depending on their risk profile, age, and portfolio objectives.

"It may be that an investor has 60 per cent to invest in shares and property, with the rest allocated to cash and bonds. So that investor's allocation to offshore shares could be 30 per cent, or even higher at 40 to 50 per cent, if they are particularly aggressive investors. It all depends on their risk profile and how much they have to invest offshore," says Brammall.

But not all Australian investors are looking abroad. SMSFs, for example, collectively allocated less than 2 per cent of their assets to offshore equities during the June quarter of 2017, while almost one third of their wealth was invested in Australian shares, according to data from the Australian Taxation Office (ATO).

"Many SMSFs don't have any international exposure, and they need more in their portfolio to take advantage of opportunities offshore," says Brammall.

Whether ETFs or managed funds are used can depend on how much an investor has to invest.

"If it's a smaller portfolio, investing in a managed fund on a platform can be a cheaper option, given the broking cost and management costs of the ETF. But for larger portfolios, ETFs can be more suitable," says Brammall.

Investing offshore carries all the general risks of the underlying investments, but there are also other risks, including currency risk. Foreign investments are usually held in the local currency and asset values must be converted into Australian dollars to determine returns.

Some select ETFs and managed funds are offered on both a hedged and unhedged basis, but most are one or the other, says Brammall.

If you decide to hedge, there is a cost to hedging and you can expect to add an additional fee of three to five basis points for an unhedged index fund and up to 10 basis points for an actively managed fund.

But like any insurance, that's a small cost compared to the returns you could be protecting if the Australian dollar appreciates.

More from Morningstar

• 2 funds to consider in volatile times

• A contrarian approach to global stocks

• Make better investment decisions with Morningstar Premium | Free 4-week trial

 

Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.